Markets are finally waking up to the coronavirus crisis, as hopes of a V-shaped recovery fade

The epidemic caught up with global stocks this week, suggesting investors had clearly misjudged its contagiousness and, just as importantly, the severity of the economic shock. Moreover, central banks appear powerless to deal with the problem

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An empty pedestrian area in Milan on February 26. Equity markets have taken fright at the sudden outbreak of Covid-19 in Italy, and an acceleration in cases in South Korea and Iran. Photo: Bloomberg

Published: 1:00am, 28 Feb 2020Updated: 3:58am, 28 Feb 2020

It took exactly a month. Ever since the coronavirus disease, Covid-19, began to move financial markets in late January, equity markets had been remarkably resilient in the face of mounting concerns, and increasing evidence, that the epidemic is disrupting supply chains and snuffing out a tentative global economic recovery.

On Monday, the calm was abruptly punctured. In the worst day for global stocks in two years, the FTSE All-World Index fell 3 per cent as investors took fright at the sudden outbreak of the virus in Italy, and an acceleration in cases in South Korea and Iran.

The S&P 500, having lost 3.4 per cent on Monday, fell a further 3 per cent on Tuesday, its first back-to-back drops of 3 per cent or more since the surprise devaluation of the yuan in August 2018.

As I argued previously, stock markets had been too complacent about the economic fallout from the epidemic. Investors instinctively believed that the impact on growth would be transitory, despite the huge level of uncertainty over governments’ ability to contain the outbreak and, just as importantly, the deep integration of Chinese firms into complex global supply chains.

The main reason equity investors initially brushed off the threat posed by the disease was their expectation that leading central banks would intervene if a serious growth scare materialised – an assumption that has proved correct in every major sell-off since the 2008 global financial crisis.